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Groupon Speculators Bet on Additional Upside

GRPN's January 2013 5-strike call is active today

by 12/7/2012 12:55 PM
Stocks quoted in this article:

Calls are the options of choice on Groupon Inc (NASDAQ:GRPN - 4.13) today. Roughly 12,000 call contracts have crossed the tape at last check, versus fewer than 2,500 puts. The stock's January 2013 5 call has emerged one of the most popular strikes thus far, where around 2,025 contracts have traded. Nearly all of these calls have crossed at the ask price, and implied volatility (IV) is on the rise -- two indications that new positions are being purchased here.

By buying these out-of-the-money calls to open, speculators will profit with each step above the $5.20 mark (the strike plus the volume-weighted average price [VWAP] of $0.20) GRPN takes through January expiration. This breakeven level represents a steep 26% premium to the equity's current perch.

Expanding the scope, long calls have been in favor on GRPN for some time, as evidenced by data at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During the course of the past 50 sessions, traders have bought to open more than four calls for every put. Plus, this call/put volume ratio of 4.33 ranks in the 99th percentile of its annual range, implying calls have been purchased over puts with more rapidity just 1% of the time within the last year.

Technically, GRPN has been a well-documented laggard on the charts, with the stock losing almost 80% of its value on a year-to-date basis. The equity's dismal price action has been highlighted by its 60-day moving average, which has ushered GRPN lower since early February. However, the stock has shown some signs of life in recent weeks, and has added nearly 59% since hitting an annual low of $2.60 on Nov. 12.

In light of this rebound, this recent rush toward calls may be indicative of short sellers initiating hedges on their bearish bets. Short sellers increased their pessimistic positions by 35% over the last two reporting periods, and short interest now accounts for more than one-fifth of the stock's available float.

What's more, if today's volume at the out-of-the-money January 2013 5-strike call is indeed short sellers hedging, they are getting this options-related insurance at a discount. IV at this strike is currently deflated compared to its 40-day historical (realized) volatility (88% vs. 118%). In other words, this near-term option is priced relatively cheaply at the moment.


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